CHICAGO (Reuters) - Nike Inc NKE.N, one of the largest corporate spenders in the U.S. sports sector, could send shock waves through the industry this year by cutting its marketing budget as part of its push to reduce expenses.
The world’s largest athletic shoe and clothing maker, known globally for endorsement deals with such athletes as golfer Tiger Woods and basketball star Kobe Bryant, as well as the Brazilian national soccer team, signaled its cost-cutting mode late Tuesday by announcing it would cut up to 1,400 jobs, or 4 percent of its workforce.
Nike’s reining in ad spending, sports sponsorships and endorsement deals was not only likely, but could be done without hurting its dominant position, analysts said.
“They have such penetration in their marketing budget that they can use attrition to cut off contracts,” said Robert Boland, professor of sports management at New York University, referring to Nike’s various sports contracts.
“You’ll definitely see a different allocation and you’ll definitely see some reduction,” he added. “When you’re the biggest, you have the power to do that.”
Nike officials would not address specific plans, but indicated nothing is sacred.
“As part of restructuring our business, we’re analyzing all aspects of our costs, including sports marketing contracts, advertising and brand marketing, to ensure we’re spending resources wisely and focusing on the business opportunities that will have the biggest impact,” Nike spokesman Derek Kent told Reuters.
“There are opportunities for reductions in endorsement contracts and we are evaluating them on a case-by-case basis,” he added.
Eliminating deals with lesser athletes, pro and college teams, and sporting events could reap Nike significant savings, analysts said.
“They still want to uphold the spending on their marquee athletes, but there are opportunities to cut back on the secondary and tertiary type athletes or even teams that perhaps didn’t really captivate or drive eyeballs to the brand,” said Stifel Nicolaus analyst Tom Shaw, who rates the stock “hold.”
In the process of dumping contracts, however, Nike could create opportunities for smaller rivals like Under Armor Inc UA.N, Boland said.
Nike spent an estimated $255 million to $260 million on sponsorships last year, up from $240 million to $245 million in 2007, according to research firm IEG, which is owned by advertising giant WPP Plc WPP.L.
The shoe giant spent $143.4 million on advertising in the first nine months of 2008, down slightly from the pace of the prior year when it spent almost $184 million overall, according to TNS Media Intelligence.
Nike surprised analysts in December by stressing cost-tightening during a conference call following third-quarter results. In the past, the company has been known for its free-spending ways.
“Nike’s sports marketing strategy looking backwards was a little bit more free-spending than it will be moving forward,” said Paul Swangard, managing director of the Warsaw Sports Marketing Center at the University of Oregon.
Credit Suisse analyst Omar Saad wrote in a Wednesday research note that Nike is at the beginning of a longer-term restructuring that will extend beyond just job cuts.
“We think a story of slowing revenues will be overshadowed by Nike’s willingness and ability to cut expenses in the coming quarters,” said Saad, who rates the stock “outperform.”
Nike's North American marketing budget is likely four times the size of what No. 2 player Adidas AG ADSG.DE spends, far above what is needed to maintain its market share, he added.
Shaw said Nike has also started spending its marketing dollars more wisely, pointing to the company’s use of Kobe Bryant in so-called viral marketing, or marketing that makes use of social networks, email and word-of-mouth to reach an audience.
“They’re still using their brand power and big, marquee endorsement contracts, but instead of coming up with an expensive TV campaign they came up with something that people are watching on YouTube,” he said. “It’s more bang, less buck.”
Reporting by Ben Klayman, editing by Matthew Lewis
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